HUP: Increased Defense Spending Could Raise GDP by 0.6 Percentage Points

Increasing defense spending to three percent of GDP could boost GDP growth by 0.6 percentage points, according to the analytical report “Focus of the Week” by the Croatian Employers’ Association, published on Friday. Investments in defense are in the public spotlight following the announcement of the EU’s plan for €800 billion in investments to strengthen the Union’s defense capabilities.

The revenues of companies in the Croatian Defense Industry Competitiveness Cluster reached €401 million in 2023, with exports increasing two and a half times to around €300 million, employers report.

The Croatian defense industry includes prominent manufacturers in various segments, including infantry weapons (HS Produkt), ballistic helmets (Šestan-Busch), and robotic systems for humanitarian demining, defense engineering, and civil protection (Dok-Ing).

Companies such as Probotika (robotics), Orqa (drones), Riz Pe (tactical radio), Audio Video Trend AVT (thermal cameras), Atir (40×46 mm ammunition), M Adlerd (VLRS weapon systems and grenade launchers), and Đuro Đaković Special Vehicles (armored vehicles and specialized maintenance wagons) also play significant roles.

Part of the supply chain includes companies specialized in security and protection solutions (Infigo Is, Solvership, INsig2) as well as manufacturers from the textile and footwear industries.

The long-term plan of the Armed Forces of the Republic of Croatia, which is expected to identify future investments and procurements, could further stimulate the development of the entire industry, say HUP representatives. They add that most companies have low debt or are not indebted at all, thus retaining high potential for further investments.

The domestic defense industry, as seen by HUP, has the opportunity to leverage upcoming changes to strengthen its position within the European defense ecosystem, while new co-financing sources could significantly accelerate the development and commercialization of some companies.

Defense Investments – Strategic Priorities

The planned reduction of dependence on third countries opens up space for the inclusion of Croatian manufacturers in the value chain, for example, in the segment of steel production, as well as for broader participation of domestic companies in joint procurements and industrial partnerships with leading companies in the European defense sector such as Rheinmetall.

Given that the future development of the Croatian defense industry will largely depend on new sources of financing and public procurement, members of the Croatian Defense Industry Competitiveness Cluster, with the support of the HUP Coordination of the Defense Industry in establishment, propose the establishment of a cross-sectoral working group.

For the further development of the defense industry, among other things, it is proposed to redirect public funds in favor of the defense industry, including cohesion policy, as well as simpler and faster access to capital through the expansion of HBOR‘s operational programs and the establishment of a Defense Investment Fund.

It is also proposed to accelerate investments based on Lithuania‘s model, which has declared all defense investments as strategic priorities to eliminate administrative barriers in obtaining permits, approvals, and complex documentation.

Employers also believe that the industry should regularly inform relevant institutions about its technological advancements and niche comparative advantages. For instance, the unmanned aerial vehicle (drone) sector can play a key role, given its strategic importance in modern conflicts, such as the war in Ukraine, where drones worth nearly $5 billion have been imported from the Chinese market.

The proposal also includes mandatory division of public tenders into smaller parts to increase the participation of smaller companies, along with clearer announcements of upcoming tenders and reserving part of contracts for small and medium-sized enterprises.